A Perfect Storm for VoIP?

In a time of economic insecurity, many companies are looking to reduce costs but still maintain a competitive advantage. The desire to strike this balance is arguably many times stronger within the small-to-midsize business (SMB) segment, where budgets are, by definition, smaller. A new study from AMI-Partners, a New York–based research firm and consultancy specializing in the SMB market, finds Voice over Internet Protocol (VoIP) projects are quickly becoming top-of-mind for companies looking for quick returns on their investments.

AMI defines small businesses as those having fewer than 100 employees, and midsize firms as those with fewer than 1000 employees. According to the study, "Cashing in on the SMB VoIP Technology Upgrade Cycle," in 2007, spending for on-premises voice communications systems (which include IP-PBX/Converged systems and TDM-PBX/Key systems) was $4.5 billion for small businesses and $1.2 billion for midsize ones. While at first glance the expenditures may seem impressive, there may be a more significant takeaway from the study, according to Sanjeev Aggarwal, vice president of the SMB information technology infrastructure solutions at AMI Partners and author of the report. "I think the key thing that is surprising is the adoption of IP solutions is still low," he says.

Aggarwal goes on to explain that his research finds the penetration rate in 2007 of IP-PBX systems was just 33 percent for midsize companies, and a mere 5 percent among small businesses -- a low level of adoption that he believes can be blamed on a dearth of imparted knowledge. "Especially in smaller businesses, a lack of education is still an issue," he says. "The onus is on the vendors, service providers, and also [company] executives through small business forums and things of that nature." He adds that the decision to install IP telephony needs to made at the executive level, not at the office or managerial level.

That said, Aggarwal says that he does see promise for the space moving forward. For small businesses, the penetration rate is projected to move from 5 percent in 2007 to 20 percent by 2012. For their midsize counterparts, AMI Partners foresees a rise in penetration from 33 to 60 percent in the same time frame. "Companies can clearly see a short-term [return on investment], and especially in today's economy, any solutions that can provide this as well as cost savings is very interesting," he explains.

It's not yet clear which vendor is likely to take the most advantage of this trend. Aggarwal, for one, says he doesn't see a single dominant player -- a vendor with 25-percent-to-30-percent market share -- either now or emerging in the next two to three years. "There is no clear leader, but rather four leading players," he explains. According to his findings, the top players (and respective market shares) in the SMB on-premises voice communications systems space worldwide in 2007 were:

Avaya (17 percent);

Cisco Systems (12 percent);

Nortel Networks (10 percent); and

NEC (10 percent).

Aggarwal specifically cites Cisco and Microsoft as two players he expects to gain strength in this market over the next several years. For Microsoft, he says, two entries into this space -- its Office Communications Server 2007 and Response Point IP-PBX system -- are significant. "With [the company's] dominant position in the SMB market, these products will see increasing adoption in the next two to four years," he writes in the report.

The economy itself may drive many SMBs to opt for VoIP, but Aggarwal says the typical life cycle of this segment's phone systems will also play a role in future adoption. Phone systems, he says, generally last approximately six or seven years, but roughly 15 percent of SMBs change phone systems every year. At times, Aggarwal adds, "compelling events" also influence purchasing decisions. "The last time...this happened was around the Y2K time frame," he recalls, referring to the technology upheaval resulting from concerns about how software would handle the turn of the century. "During that time many [organizations] changed and updated their phone systems. So, looking at that and the seven-year life cycle, we [may] see a larger-than-normal amount of companies change their phone systems now."

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